FM company considers the purchase of two different types of machines, Machine A and Machine B, to manufacture ball bearings, of the many products it produces for the car market. Each machine will cost P750,000; will have five years economic life with zero salvage value. Both machines will meet the capacity of the projected demand. The operating after-tax cash flow per year of each machine is as follows: Machine Period A B 0 (P750,000) (P750,000) 1 100,000 250,000 2 200,000 250,000 3 200,000 250,000 4 300,000 250,000 5 550,000 250,000 FM has to decide which of the two machines to buy for the manufacture of ball bearings. The Vice-President for manufacturing was unsure of which method of ranking alternatives to use. REQUIRED: You are requested to make the calculations under the following methods, recommend which machine to buy under each method. Payback period Accounting rate of return Internal rate of return Net present value (cost of capital = 10%) Net present value (cost of capital = 12%)
FM company considers the purchase of two different types of machines, Machine A and Machine B, to manufacture ball bearings, of the many products it produces for the car market. Each machine will cost P750,000; will have five years economic life with zero salvage value. Both machines will meet the capacity of the projected demand.
The operating after-tax cash flow per year of each machine is as follows:
Machine
Period A B
0 (P750,000) (P750,000)
1 100,000 250,000
2 200,000 250,000
3 200,000 250,000
4 300,000 250,000
5 550,000 250,000
FM has to decide which of the two machines to buy for the manufacture of ball bearings. The Vice-President for manufacturing was unsure of which method of ranking alternatives to use.
REQUIRED: You are requested to make the calculations under the following methods, recommend which machine to buy under each method.
- Payback period
- Accounting
rate of return
Internal rate of return
Net present value (cost of capital = 10%)
- Net present value (cost of capital = 12%)
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